How to spot the opportunity for a Management Buy Out (MBO)

The opportunity for a Management Buyout (MBO) is rare and requires vigilance to recognize potential signs that the current owner may be willing to sell. In privately-owned businesses, these signs may include:

  • The owner’s desire to retire or a lack of family succession.
  • Shareholders wishing to reduce risk by realizing cash.
  • Some shareholders wanting to exit the business.
  • Institutional owners, like private equity houses, looking to realize their investments.

Various circumstances can create an MBO opportunity, such as:

  • Owners wanting to retire or pursue other opportunities.
  • A group selling a non-core subsidiary to raise funds or focus on core activities.
  • Investors seeking to realize their investment.
  • Shareholder conflicts necessitating one or more shareholders’ exit.
  • A public company aiming to become private.
  • An administrator selling a business as a going concern.
  • Corporate entities selling unwanted acquisitions with non-core businesses.

Several key attributes make an MBO attractive to investors:

  • A capable Management Team with the drive and commitment to deliver business growth.
  • A commercially viable business with a demonstrable growth strategy.
  • Cash flow capable of supporting an MBO financing structure.
  • A willing vendor with a realistic price expectation.
  • A feasible exit opportunity for investors and the Management Team.

When the right time for an MBO is identified, approaching the current owner requires careful planning and timing, as the relationship with the owner is crucial. Seeking permission from the owner to consider an MBO is a critical first step, and understanding the owner’s willingness to sell and any sensitivities is essential before proceeding.

Working with a financial adviser to conduct an initial feasibility study is advisable before making an approach, as it provides an indication of the deal’s viability. All interactions with the vendor should be handled with care, considering confidentiality and the MBO team’s duties to shareholders.

The willingness of the vendor to sell at a realistic price is paramount, and understanding their motivations for disposing of the business is crucial. Initiating MBO discussions can be delicate, and professional advice is essential to navigate the process smoothly.

Ultimately, without a willing vendor, the MBO deal cannot proceed. Therefore, it is crucial to approach the vendor early in the process, and the involvement of a financial adviser is beneficial to confirm the deal’s viability and fundability.

Throughout the process, sensitivity is essential as the MBO team remains employed by the business until the deal is completed or abandoned. Observing fiduciary duties as directors until vendor approval is obtained is of utmost importance.